In 1912, financier JP Morgan stated in his testimony before Congress, “Gold is money. Everything else is credit.” Today, in the summer of 2023, its the third year after the outbreak of the coronavirus pandemic, and a record heatwave in the US and Europe is shifting attention to financing the green energy transformation and the need to fight climate change.
During the pandemic, governments around the world were in a spending spree and added massively to their indebtedness. Globally, US$10T of government funds had been mobilized between 2020 and 2022 to keep the economy rolling. This all came with a price: government debt in the US surpassed US$32T, and (as a percentage to GDP), we foresee it rising above 130% by late 2023. The only countries of economic significance where debt levels are exceeding this ratio are Japan and Italy, the problem child of the European Union. But, government debt is only one factor. To calculate the total debt of an economy, you need to add consumer debt, starting from mortgages, car leases, credit card debt, and corporate debt to the equation. Since the 1970s, the growth of total debt has exceeded economic growth, adding leverage to the economic system. Over the last two decades, the global financial crisis, the pandemic, and the green energy transformation, are accelerating debt levels beyond imagination.
In 2022, global public debt surged to a record of US$92T2. Where is all this money coming from? All these dollars, euros, and yen? It is credit. Credit magically created by Central Banks which are financing government deficits, by the fractional reserve banking system, and by lending activity of the private banking sector3. By the end of 2022, global debt exceeded global GDP by a breathtaking 350%. To understand the significance of this number properly, and to put it into the right perspective why gold is not a financial relic of the past, we need to take a step back and understand the ascent of money4.
At its core, money needs to fulfill four basic functions: be a medium of exchange, a measure of value, a standard of deferred payment, and a store of value. If it is fulfilling these basic functions, nearly everything can be money; seashells, precious metal coins, or bitcoin. Money today, either in printed or in digital form has no intrinsic value. It is fiat money, created by the government.
“We have gold because we cannot trust governments.”
— Herbert Hoover
While gold has fascinated humankind for more than 5,000 years, it hasn’t always been the base of the monetary system. Many countries experimented with a gold or silver standard in history, in which the currency is based on a fixed quantity of either gold or silver. With WWI and WWII, the world order changed, and the hegemony of the US dollar began. All major currencies have been pegged to the US dollar, and the US dollar was pegged to gold. In 1971, US President Richard Nixon suspended the convertibility of the dollar into gold, and the international monetary system started the biggest economic experiment in history: a system of free-floating currencies without any base or anchoring, with gold being a relic of the past5.
Since then, credit induced growth has become a success model, but only because the nominal value of money is often mistaken for its purchasing power. Classic economic theory claims that money is neutral and unimportant, that “money is a veil on the real economy.” Also, the quantitative theory of money teaches us that it only affects prices, and that it has no real effect on the economy. In the hamster wheel of our consumerist economy model, a moderate rate of inflation spurs consumption and stimulates economic growth. It is no secret that US$100 today will get you less than it did 10 or 20 years ago. Between 1913 and today, the US dollar has lost more than 98% of its purchasing power6. This is inherent to all fiat currencies, disqualifying them as money in the long-term as they are not able to store value.
“Gold is a money that governments don’t print.”
– Charles Stevenson
Since the 1970s, monetary dams have first weakened, broke, and now the waves of new money are breaking at Cape Fear. Gold’s purchasing power on the other hand has remained remarkably stable in the past ~500 years, at least until the end of the Bretton Woods system in 19717. Even today, gold as a store of value is defiantly checking all the right boxes.
Combining public, corporate, and household debt, the global debt stock grew by US$8.3T to a near-record US$305T in Q1 20238. Either by knowledge or by instinct, people understood that the combination of high debt levels and rising interest rates has pushed up debt service costs, prompting concerns about the use of leverage in the financial system and in personal finance alike.
In the US, the Fed Funds Rates moved from 1.75% a year ago, to 5.25% now. First stress signals came from the regional banking sector. On the consumer side, the housing market feels the pain as a 30-year fixed rate mortgage is now exceeding 7%. The average car leasing rates increased to 6.4%. And the average credit card interest rate exceeds 25% — more than double since 20169. For developing countries, debt levels have already been translating into a substantial burden. In many African countries, the amount of money spent on interest payments is higher than spending on either education or health. Furthermore, in the US, debt service might become the third biggest budget position, after social security and Medicare within a few years10. The key questions remain: how much debt is sustainable for an economy? Can precious metals or cryptocurrencies, like bitcoin, be an answer to a tumbling dollar11?
“Central banks gold buying in 2022 broke records. With more than 1,100t, they bought the most gold since 1967 last year.”
— World Gold Council
In 2020, Bank of America put a price tag of US$3,000 on gold for the coming years. More short term, the bank sees gold at US$2,200 in the fourth quarter of 2023. Denmark’s Saxo Bank even believes gold has the potential to hit US$3,000 or US$4,000 in the coming months.
Central banks are certainly believers of gold as a financial asset. On rising inflation, geopolitical uncertainties, and to hedge fiat currencies; central banks around the world turned out to be the biggest gold buyers in recent years. In the first quarter of 2023, central banks bought 228t of gold, following a record annual demand of 1,136t in 2022.
Considering all these factors, it seems a bit superficial listening to Taylor Swift singing, “There’s only so far new money goes,” in the song The Last Great American Dynasty12. Swift was not referring to money and credit creation — the fear concerning the stability of our monetary system, or a potential demise of the dollar and other fiat currencies. Give me some old-fashioned gold instead because my trust in governments is limited13.
